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Blue Ocean Strategy

Business Creativity & Innovation

Creating uncontested market space


and make the competition irrelevant

W. Chan Kim
The Boston Consulting Group
Bruce D. Henderson Chair
Professor of Strategy and
International Management
Rene Mauborgne
The INSEAD Distinguished
Fellow and Professor of Strategy
and International Management

Red Ocean
Compete in
crowded
markets
Blue Ocean
Create and
capture new
market space

CREATING BLUE OCEANS


Two types of markets:

Red Oceans all industries in existence today


(known market space)

Blue Oceans all industries not in existence


today (unknown market space)

NEW MARKET SPACE

There is a fairly good understanding of how to


compete in Red Oceans

Blue Oceans are known to exist, however,


there is little practical guidance on how to
create them

This book focuses on the analytical frameworks


necessary to create Blue Oceans and the
managerial strategy needed to sustain them

NEW MARKET SPACE

In Red Oceans, industry boundaries are


defined and accepted, and the competitive
rules of the game are known

In Blue Oceans, there exists untapped


market space, demand creation, and the
opportunity for highly profitable growth

Most Blue Oceans are created from within


red oceans by expanding industry
boundaries

THE CONTINUING
CREATION OF BLUE
OCEANS

How many of todays industries were


unknown 100 years ago?

Blue Oceans have continuously been


created over time

The key to strength in the business world


is to create new, uncontested market
space

Two different worlds


Red Ocean Strategy

Blue Ocean Strategy

Compete in existing market


space.

Create uncontested market


space.

Beat the competition.

Make the competition


irrelevant.

Exploit existing demand.

Create and capture new


demand.

Make the value-cost trade-off. Break the value-cost trade-off.


Align the whole system of a
strategic firm's activities with
its choice of differentiation or
low cost.

Align the whole system of a


firm's activities in pursuit of
differentiation and low cost.
VALUE INNOVATION

Imperative of Creating Blue


Oceans
Supply exceeds demand
Accelerated commoditization of products and
services
Increasing price wars
Shrinking profit margins
Brands are becoming more similar
select based on price

Imperative of Creating Blue


Oceans

Globalism has made many brands become


increasingly similar and more of a commodity

Technological improvement has caused supply


to outweigh demand

It is now harder than ever to differentiate among


brands

IMPACT OF CREATING
BLUE OCEANS

In a study of the launches of 108


companies, 86% were line extensions
(Red Ocean)

However, these only accounted for 62%


of total revenues and 39% of total profits

The other 14% of launches were aimed


at creating blue oceans and accounted
for 38% of revenue and 61% of total
profit

THE PROFIT AND GROWTH


CONSEQUENCES OF BLUE
OCEANS

FROM COMPANY AND


INDUSTRY TO STRATEGIC
MOVE

The company is not the appropriate unit of


analysis for exploring blue oceans

Blue Oceans focus on the strategic move


rather than the company or industry

This book focuses on 150 strategic moves


made from 1880 to 2000 in various industries

Blue Oceans were found to be created by new


and old companies, attractive and unattractive
industries, and both private and public
companies

VALUE INNOVATION:
THE CORNERSTONE OF BLUE
OCEAN STRATEGY

Value creation alone improves value but is not sufficient to


make you stand out in the marketplace

Innovation alone will often create a product that buyers are


not willing to pay for

Value innovation occurs only when companies align


innovation with utility, price, and cost positions

Value innovation:

Make the competition irrelevant

Create a leap in value for both buyers and your company

Open up new and uncontested market space

Unlocking non-customer demand


Value Innovation
Utility
Create new
buyer
utilities

Price

Cost

Set a price that


attracts a mass
of buyers

Set the structure


based on a target

MINIMIZING RISKS AND MAXIMIZING


OPPORTUNITIES IN FORMULATING AND
EXECUTING BLUE OCEAN STRATEGY
Core/Formulation Principles

Formulation Risks

Reconstruct market boundaries

Search Risk

Focus on the big picture, not the numbers

Planning Risk

Reach beyond existing demand

Scale Risk

Get the strategic sequence right

Business Model Risk

Execution Principles

Execution Risks

Overcome key organizational hurdles

Organizational Risk

Build execution into strategy

Management Risk

Kim & Mauborgne 2006

BOS Logic: The Core Principles


Reconstruct Market
Boundaries
overcome believes.
Reach beyond
existing Demand
go for uncontested space.
Get the strategic
sequence right
value [innovation] first.

COST

VI
VI
VALUE

BOS Logic: Reconstruct market boundaries


Boundaries of
Competition

Head-to-Head
Competition

Creating
New Market Space

Focuses on rivals within its


industry

Looks across alternative


industries

Focuses on competitive position


within strategic group

Looks across strategic groups


within its industry

Focuses on better serving the


buyer group

Redefines the buyer group of the


industry

Scope of Product
and Service
Offerings

Focuses on maximizing the value


of product and service offerings
within the bounds of its industry

Looks across to complementary


product and service offerings that
go beyond the bounds of its
industry

Functional-emotional
Orientation of an
Industry

Focuses on improving priceperformance with the functionalemotional orientation of this


industry

Rethinks the functional-emotional


orientation of its industry

Industry

Strategic Group
Buyer Group

Time/Trends

Focuses on adapting to external


trends as they occur

Participation in shaping external


trends over time

BOS Logic: The Core Principles


Reconstruct Market
Boundaries
overcome believes.

Reach beyond
existing Demand
go for uncontested
space.
Get the strategic
sequence right
value [innovation] first.

COST

VI
VI
VALUE

BOS Logic: Reach beyond existing


demand

Core Customer

Soon-to-be-NC

Noncostumer

Refusing Customer

THREE TIERS OF
There
is a universe of
CUSTOMERS
noncustomers which can be
turned into customers to offer a big
blue ocean market.

3rd

1st tier: Soon-to-be


noncustomers who are on the
edge of your market
2nd tier: Refusing
noncustomers who
consciously choose against
your market
3rd tier: Unexplored
noncustomers who are in
markets distant from yours

2nd

1st

Three Tiers of
Three tiers of non-customers:
Customers

1: buyers who purchase your industry offerings out of


necessity; will jump ship if given an opportunity.

2: buyers who purchase alternative offerings that serve


the same function

3: people who dont consume even the alternatives to


your offerings

Non-customer demand is unlocked by


providing new buyer utilities, at a price that
attracts a mass of buyers, given target costs.

Buyers could be not only end-users, but also


other participants in a value chain (e.g.
distributors)

BOS Logic: The Core Principles


Reconstruct Market
Boundaries
overcome believes.
Reach beyond
existing Demand
go for uncontested space.

Get the strategic


sequence right
value [innovation] first.

COST

VI
VI
VALUE

BOS Logic: Get the Strategic Sequence right


Buyer utility
Is there exceptional buyer
utility in your business idea?

No Rethink
YES
Price
Is your price easily accessible to
the mass of buyers?

YES

No Rethink

Cost
Can you attain your cost target to
profit at your strategic price?

No Rethink

YES
Adoption
What are the adoption hurdles in
actualizing your business idea?
Are you addressing them up
front?

YES

No Rethink

FOUR ACTIONS FRAMEWORK:


KEY TO VALUE CURVE
The key to discovering a
new value curve lies in
answering four basic
questions

Eliminate
What factors that the
industry has taken for
granted should be
eliminated?

Reduce
What factors should
be reduced well
below the industry
standard?

Creating
new markets:
A new value
curve

Raise
What factors should
be raised well above
the industry
standard?

Create/Add
What factors that the
industry has never
offered should be
created or added?

Cirque du Soleil example

STRATEGY CANVAS
high

low

Industry Variables

FOUR STEPS OF VISUALIZING


1. Visual
Awakening

2. Visual
Exploration

3. Visual
Strategy Fair

4. Visual
Communication

Compare your
business with your
competitors by
drawing your as is
canvas

Go into the field to


explore the six
paths to creating
blue oceans

Draw your to be
canvas based on
insights from field
observations

Distribute your
before-and-after
strategic profiles on
one page for easy
comparison

Observe the
distinctive
advantages of
alternative products
and services

Get feedback on
alternative strategy
canvases from
customers,
competitors
customers, and
non-customers

See where your


strategy needs to
change

See which factors


you should
eliminate, create or
change

Use feedback to
build the best to
be future strategy

Support only those


projects and
operational moves
that allow your
company to close
gaps and actualize
the new strategy

EXAMPLES IN THE
PHILIPPINES: